Exclusive | Industry seeks Finance Ministry assurance on GST rate cuts; warns of duty inversion risks

India’s landmark move towards the next generation of Goods and Services Tax (GST) reforms has sparked concern among key industries.The worry is that proposed rate cuts could create inverted duty structures, negating the intended benefit for consumers.According to sources, multiple sectors—including tractors, pharmaceuticals, medical devices, chemicals, fertilizers, textiles, and insurance—have flagged concerns to the Finance Ministry.
The common fear is that if GST on finished goods or services is slashed without corresponding alignment of input taxes, the resulting inversion will block credits, increase compliance burdens, and in some cases, raise costs instead of reducing them.What is duty inversion?Duty inversion occurs when the GST levied on inputs is higher than the tax on finished goods or services. In such cases, companies accumulate unused input tax credits, which tie up working capital and require refunds from the government—often delayed.“Industry has clearly told the Finance Ministry that unless inversion is addressed, rate cuts won’t lead to price reduction for consumers,” a source said.Insurance sector: Zero-rating as a solutionSudipta Bhattacharjee, Partner at Khaitan & Co, explained that a full GST exemption for insurance could backfire.“A complete exemption will lead to a blockage of input GST credit for insurance companies, pushing up their costs. A reduction to 5% may be a better solution. If the intent is to take away GST altogether, the best option would be to extend ‘zero rating’—currently available only for exports and SEZ supplies—to insurance services.”Pharma’s inversion worryThe pharmaceutical industry, one of India’s biggest export success stories, is staring at a sharper inversion risk.At present, finished formulations are taxed at 12%, while Active Pharmaceutical Ingredients (APIs) face 18%. If GST reforms push formulations down to 5% while APIs remain at 18%, the inversion gap would jump from 6% to 13%.“This reform is welcome, but without rate parity between APIs and formulations, it risks squeezing MSMEs and undermining India’s healthcare goals,” said Bhavin Mehta, Vice Chairman, Pharmexcil.Impact on patients and MSMEsPrice-controlled drugs: Under the Drug Price Control Order (DPCO), companies cannot freely increase prices. A deeper inversion would erode margins, potentially forcing withdrawal of essential drugs and risking shortages.MSMEs: Smaller pharma firms already face tight liquidity. Paying 18% GST upfront on inputs while earning just 5% on sales locks up working capital. Refund delays further strain survival.Exports: Although exports are zero-rated, upfront GST payments on APIs tie up funds critical for research, scaling up production, and meeting international supply commitments.Chemists flag patient impact
Welcoming Prime Minister Narendra Modi’s Independence Day announcement on GST rationalisation, the All India Organisation of Chemists and Druggists (AIOCD)—which represents 12.40 lakh chemists and distributors nationwide—stressed that medicines are not luxury commodities but lifelines.“AIOCD members are the last-mile healthcare providers directly interacting with 140 crore citizens, and any increase in medicine bills directly affects patients,” said President J S Shinde and General Secretary Rajiv Singhal.They urged the Finance Ministry to ensure that essential medicines regulated under the Drug Price Control Order (DPCO) do not face any additional tax burden, and demanded that most medicines and supplements fall within the 5% GST slab. They also suggested placing medicines for critical illnesses like cancer, kidney and cardiac diseases under the 0% GST slab.Shinde and Singhal added that reducing GST will directly ease the burden on millions of patients and families, especially those without health insurance.
Industry’s prescriptionThe pharmaceutical industry recommends aligning GST rates for APIs and formulations:Both at 5% to maximise affordability, orBoth at 12% to balance revenue needs with efficiency.Support measures sought include:A fast-track refund mechanism with 15–30 day timelines.Interest on delayed refunds to discourage backlogs.A special refund window for capital goods like machinery, enabling MSMEs to modernise facilities.Correcting wider anomaliesMehta also noted that GST exemptions on hospitals and diagnostics create “embedded taxes” of 5–6% on consumables and equipment, costs that ultimately burden patients. Rationalising these would make healthcare more patient-friendly and efficient.In step with GST 2.0The Prime Minister, in his Independence Day speech, emphasised that GST 2.0 will prioritise fixing inverted duty structures to free up working capital, simplify compliance, and boost exports.“Aligning APIs and formulations under the same slab would directly support this national goal,” Mehta said, adding that parity would make GST reform a genuine enabler of India’s dual objectives—affordable healthcare at home and global pharma leadership abroad.ALSO READ | Centre eyes swift rollout of GST rate cuts; states’ consent, industry transition are key hurdles

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